Managing director, co-head European credit markets, global fixed income credit markets, Citigroup

Charlie Berman tells Geraldine Lambe that Citigroup is perfectly positioned to capitalise on a European shift to a capital markets-based corporate funding.

To Salomon Brothers’ diehards and those of us hooked on the piratical

romance portrayed in Michael Lewis’ Liars Poker, Citigroup’s

acquisition of Salomon Brothers (already bearing the mantle of earlier

M&A activity with Smith Barney) seemed to signal the final

subjugation of the legendary Wall Street firm. But if Charlie Berman,

co-head of European credit markets, is to be believed, incorporation

into a global giant and corporate monolith has done nothing to dispel

the old firm’s spirit; rather, the move added a bit of bite to what had

by then become a somewhat jaded recipe.

“We [Salomon Brothers] always thought and acted as if we were the best

bond house in the world – even when perhaps we were not,” says Mr

Berman. “The mergers meant we went from competing in a much loved but

old model jalopy to driving a Ferrari: more horse power, better brakes

and lots of buttons to push. Almost all the Salomon fixed income people

stayed on and the new combination of talent was striking.

“At Citigroup we have an embarrassment of riches in terms of people,

products and relationships. At Salomon, we had a more limited palette

and the fun was often winning business against the odds. We were always

a challenger for the ‘knock-out’, but never a real contender for the

long haul of the league competition.”

It was just over six years ago that Mr Berman and his Salomon

colleagues were checking out of the Mandarin Hotel in Hong Kong after a

World Bank meeting, when their mobile phones rang simultaneously and

they were asked to dial into a conference call. The reason? They were

being sold to Travellers Group.

Less than six months later, they were facing the Citigroup merger and

soon after that came the forced march from Salomon’s beloved offices in

London’s Buckingham Palace Road to Canary Wharf (news of which is said

to have caused Mr Berman to hyperventilate).

While it is now in the advanced stages, Citi’s evolution is not yet

complete and is unlikely to stop – but that is to be applauded rather

than lamented, says Mr Berman. “We have not forced too rapid an

integration. There was never the intention to smash the firms together.

Our mantra has been ‘do no harm’. If you make a change, it must be

additive, not simply for the sake of change.”

Regional flexibility

Outsiders rightly perceive Citigroup as a financial colossus – and

many assume that it is both blessed and burdened with the traits

associated with such bulk: the enviable financial clout and geographic

reach of global firms can be rapidly undermined by their associated

inflexibility and the inability to move quickly. But Mr Berman says

that is not the case with this particular giant. For example, each

region has the flexibility to tailor the Citi model to suit regional

needs, rather than suffer the imposition of a US-centric vision on a

non-US environment. So, when Citigroup’s US business combined its debt

capital markets and derivatives marketing groups to create Fixed Income

Capital Markets, European colleagues were simultaneously working on a

model appropriate to their own local conditions.

“The US and European financial markets are at a different stage of

evolution and in the corporate area, we felt the first critical link

was between loans and bonds in Europe, so we focused on integrating

those two business lines to create European Corporate Debt Markets

(ECDM). The broad strategy is identical but individual tactics are

allowed to be different,” says Mr Berman.

Making differences count

It is the differences between US and European markets that will

enable Citigroup’s European operations to make an even greater

contribution to group profits, he says. Q2 figures revealed that the

net income of Citi’s Global Corporate and Investment Bank, EMEA, had

grown by 53% over the previous year. Citi does not break down income by

product line (for public consumption, at least) but as for most firms

over the past couple of years, fixed income is the foundation on which

such happy figures are built.

What the firm will reveal is that net income for fixed income in Europe

has doubled in the past three years and now represents more than 20% of

Citi’s global fixed income results. While the global fixed income

nirvana may be at an end, Mr Berman remains all smiles. In Europe, he

says, structural and market-driven changes will present opportunities

for growth.

“The US has a very mature loans and bond market and is very interest

rate sensitive; it’s unlikely to grow that rapidly. Europe, on the

other hand, is still very much a bank-financed corporate landscape that

is only at the beginning of the transformation to a capital markets

world. There is a huge volume of bonds waiting to be issued here in

order to take out the bank finance. The removal of capital barriers and

the creation of a single market creates the opportunity for long-term

sustained growth,” says Mr Berman.

It is not simply a matter of banks pushing more profitable bond

business, he says, but rather a concurrent pressure from investors and

corporates. “Banks are now less inclined to maintain a large and static

loan portfolio that adds little to the bottom line. But at the same

time, European corporates are taking an increasingly sophisticated view

of their liability structure and investors need to focus on credit

products because it is not possible to generate return out of pre-euro

interest rate and FX volatility,” he says.

The profound change that is under way in European capital markets is

allowing firms to broaden their areas of activity so that they are no

longer so reliant on “ploughing the same field”, says Mr Berman.

Further opportunities and another sign of European capital market

maturation include market-driven developments such as the accelerated

evolution of the long-term market in euros, the development of

index-linked products in the government sector and retail capital

instruments for insurance companies and banks. In the asset-backed

market, innovation in securitisation techniques is at its most dramatic

in Europe.

Capital opportunities

“We have got a huge pool of capital in Europe that is coalescing

far more; it is able to flow more freely,” says Mr Berman. “That gives

rise to opportunities to tap into it in different ways. It’s a long

journey that is just beginning and it means there are lots of ports to

call into on the way. It means we can be confident in making long-term

plans for resources, structures and people.”

Even if there has not been a rush to integrate Citigroup’s component

parts, Mr Berman believes the structures that are now in place are the

right ones. As for many other firms, integration is the name of the

game for Citigroup. Aside from the creation of ECDM, Citigroup in

Europe created the Fixed Income Financial Institutions Group about 18

months ago. This married senior and subordinated debt and hybrid

capital with synthetic collateralised loan obligations and other

derivative products, and cash securitisation. “It was essential to be

able to have a completely integrated asset liability dialogue with

financial institutions,” says Mr Berman.

Derivatives gain ground

Equally, integration rules in Citigroup’s sovereign and

supranationals sector, where several years ago the client management of

its government auction and international syndication businesses were

merged. Mr Berman says that derivatives are increasingly an integral

part of the equation.

He believes Citi is well positioned to circumnavigate any decline in

global fixed income business, particularly as Europe has a long way to

go before its corporate bond market catches up with the US – currently

about 7% versus the US’s 40% of GDP, according to central bank figures.

And, as derivatives products and global distribution capabilities

become more important to European corporates, analysts expect Citi to

increase its debt underwriting market share (currently 7.6% compared

with 20.6% in the US) at the expense of local or regional players.

At the same time, while many other banks are shrinking their loan

portfolios, Mr Berman says Citigroup does not intend to sideline its

lending business. A lot that is written about lending (and in

particular Citigroup’s approach) “misses the point”, he says.

Citigroup’s competitive advantage is not the ability to commit a

billion dollars to an event-driven circumstance – monoline firms can do

that at a push, he stresses.

“It is our ability to be everywhere at any time, not just to leverage

the balance sheet but to make us an indispensable partner in the

day-to-day operations of our customers.

“Not only do we have the balance sheet, the debt and equity capital

markets execution and distribution capabilities, but we also provide

other advisory, treasury and transactional services not touched by

traditional competitors. I am very happy not to have to compete with

Citigroup.”

Career history

Graduated from Manchester University with a degree in English law.

In 2000, awarded the PricewaterhouseCoopers Award for Capital Markets

Achievement. Joined the executive committee of the International

Primary Market Association in 2003.

1980: Joined Bank of America NT&SA as graduate trainee lending

officer. Moved into FX sales. Promoted to associate vice-president in

debt division of Bank of America International

1985: Appointed vice-president in the loans team, focused on embryonic

European commercial paper and medium-term note markets. Appointed as

director responsible for yen, Australian dollar and Japanese warrants

issues

1988: Joined Merrill Lynch International as associate director in

product development within the investment banking division. Focused on

financial institutions and hybrid capital. Promoted to director in 1989

1990: Joined Salomon Brothers International as a director in investment

banking for financial institutions, focusing on hybrid capital

1991: Moves to Salomon’s debt capital markets and added sovereign and supranational coverage

1995: Appointed managing director and co-head of European DCM

1996: Promoted to head of European DCM

2001: Appointed co-head of European credit markets for Citigroup

2003: Additionally appointed co-head of European corporate debt markets

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